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The Bulls' Unrealistic Hopes Were Crushed by Fed Once Again

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https://realmoney.thestreet.com/investing/stocks/the-bulls-unrealistic-hopes-were-crushed-by-the-fed-once-again-16111310
 
The Bulls' Unrealistic Hopes Were Crushed by the Fed Once Again
 
The issue now is whether the market can find technical support and deliver a little holiday cheer in the next two weeks.
 
By JAMES "REV SHARK" DEPORRE
 
December 15, 2022 | 07:30 AM EST
 
Most of the rallies during 2022 were produced by the unrealistic belief that inflation would hit a peak, the Fed would turn less hawkish, and the bear market would come to an end. After so much misery, it is understandable that market players would embrace this narrative, but it was overly simplistic and ignored how hard it would be to unwind more than a decade of monetary excess.
 
On Wednesday, Fed Chairman Jerome Powell reminded the market that the Fed was hawkish and would stay that way for a while. Yes, it is positive that CPI has peaked and is trending down, but inflation related to labor and employment is still very elevated and not showing any signs of abating. I discussed this extensively in my column on Wednesday morning.
 
Powell also has warned the market that while the Fed might slow the pace of rate hikes in the near term, there was the likelihood that rates would go higher than expected longer term and stay that way for a while. The Fed confirmed that on Wednesday with a one-half percentage point hike and clear indications that it sees rates going higher next year as hikes totaling another 75 basis points are likely to roll out.
 
Despite Powell's clarity, there is reluctance among market players to embrace this hawkish narrative. There is a belief that the Fed is being too aggressive and will need to shift its stance as the economy falls into a recession early next year. The market is not pricing in the rate hikes that Powell says are coming.
 
That is where we stand as we deal with the last two weeks of the most miserable market since 2008.
 
Technically the S&P 500 failed at key overhead around 4,100 and is now back under its 200-day simple moving average. There is trading range support at around 3,920 that market players will watch carefully.
 
The main short-term issue is whether market players can shrug off the bearish economic narrative and manage a little holiday cheer. The bears are scoffing at the notion of positive seasonality and expect the bulls to be trapped by their optimism, but we will see how the price action develops as we digest the Fed decision and look ahead to 2023.
 
There are not many major economic events in the next two weeks and we will need to wait for a while for the start of earnings season, so there is an opportunity for bulls to develop a little upside momentum.
 
My game plan is to be more aggressive with buys on weakness but to keep stops tight and sell into strength. I still see little reason to build longer-term positions right now, although there may be interesting tax-loss-selling candidates.
 
We have a negative start on tap here on Thursday, but I expect to see dip-buying develop.